Foreign investors call on Russian government to stand-in on falling market

Leading foreign investors, operating in Russia, called on Russia’s Prime Minister Dmitry Medvedev to set clear rules for doing business in the country during the yesterday’s annual meeting of the Russian Consultative Council for Foreign Investments.

According to the companies, only in 2014 the unpredicted measures of the Russian government resulted in their losses of about 1.5 billion euros and this trend currently continues this year.

The majority of foreign investors are currently unhappy with the implemented practice of import substitution in Russia, which creates serious problems for their further expansion in Russia.

According to Jean-Pascal Tricoire, CEO of Schneider Electric, Russia remains an important market for the further development of the company, however the ever changing market rules forces the company to postpone taking further investment decisions.

According to foreign investors, there are a lot of problems, which complicate their further development in Russia, among which are excessive state regulation, import substitution and strict localization requirements.

Serious questions are also raised with the current customs regime in Russia, which prevents the increase of the level of processing in the country.

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Due to high import duties, further investments in the expansion of production is unprofitable for the majority of foreign investors, doing business in Russia, while the problem can be solved by more active processing. However the list of goods is restricted, while confirmation the country of origin after processing is usually associated with serious difficulties.

In addition, long, (up to six months) procedure of VAT refund currently remains another obstacle for doing business in Russia to foreigners.

Finally, lack of tax rules during the allocation of costs and benefits within transnational companies also reduces the attractiveness of Russia for foreign investors. At present foreign investors are forced to transfer money through service contracts, which creates additional tax risks. To date, many Russian divisions of international banks have faced with the claims of the tax authorities. The current method of monitoring the transfer prices does not allow to assess the share costs.

According to the Central Bank of Russia, foreign direct investments in Russia in 2014 fell by 3 times, compared to 2013 (from $69.2 billion to $22.9 billion), while in the first half of the current year the level of decline was equivalent to 5.7 times (from $24.7 billion to $4.3 billion).

The beginning of sanctions’ war resulted in the leave of many Western oil and gas companies, auto makers, airlines, retailers, financial companies and insurers from the Russian market and, according to predictions of some Western analysts, there is more to come, as several multinationals are still considering leave Russia by during the next 1-1,5 years in the case of further deterioration of local business environment and devaluation of the national currency – ruble.

The current generally negative market trends are confirmed by statistic, according to which, net capital outflow from Russia is registered for the eighth year in a row. From 2008 to 2014 about US$571 billion were withdrawn from the economy of the country and these figures are steadily growing. If in 2012 these figures varied in the range of US$54.1-US$56 billion, than in 2013 it reached US$61 billion, and US$151.5 billion in 2014. This year the outflow of capital from Russia will vary in the range of US$87 billion-US$100 billion.